Consequently, the reverse repo rate under the LAF will remain unchanged at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 7.75 per cent.
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Accordingly, the RBI kept its growth projection for 2015-16 unchanged at 7.4 per cent with a mild downside bias. “This is because banks’ deposits have to compete with other small savings instruments, which offer high interest rates”.
“Then the whole issue of rupee stability in the backdrop of chances that US Fed may raise the interest rates, would influence the monetary policy and the industry must be prepared for the unfolding events”, the industry chamber said in a pre-policy note. Banks have only transferred half of the cut to consumers even though the RBI has repeatedly stressed on lenders trimming rates to improve credit growth. “As anticipated in our previous policy, retail inflation measured by the consumer price index (CPI) increased for the third successive month in October, pushed up by a surge in the monthly momentum”, remarked Rajan.
“We are still accommodative and will always be vigilant”, Rajan said after the policy announcement. However, it retained the 7.4% GDP forecast with Rajan saying the economy was “well and truly” in the midst of a recovery though there were areas of weakness.
In the last policy, RBI had said inflation was expected to reach 5.8 per cent by January 2016.
Most of the 40 economists surveyed by Reuters had expected RBI to keep the main repo rate INREPO=ECI unchanged for now and lower it once more by the end of June. If RBI is hugely impressed with the government’s commitment to contain fiscal deficit and supply side management that can dampen food inflation and a cut in small savings rates that enables banks to pare their deposit rates, it may go for yet another out-of-turn rate cut and not wait for the April policy.
Rajan said the central bank would follow developments on commodity prices, especially food and oil, and also track inflationary expectations and external developments.
Giving hopes of lower lending rates, ICICI Bank managing director and chief executive officer Chanda Kochhar said: “As the impact of monetary policy measures taken so far play out in terms of bank funding costs, lending rates are expected to continue to moderate”. “Rural wage growth, as also corporate staff costs, remain subdued”, Rajan also said in his statement.
On Tuesday. Rajan said the RBI has front-loaded its policy action in response to weak domestic and global demand, which held back investment.
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I would bet on the next rate cut in April, and that too only if there is “space for further accommodation”.
